FALLING IMPORTS AND INDUSTRIAL DOWNTURN
TARIQ AHMED SAEEDI (email@example.com)
Jan 18 - 24, 2010
Pakistan's current account deficit decreased significantly to 1.8 percent of GDP in the first five months of the current financial year from 10.5 percent in the corresponding period of last fiscal year. In dollar terms, the balance was recorded at negative $1359 million as compared to negative $7318 million.
In this period, trade deficit declined to $4697 million against $7054 million. Both decrease in imports and exports caused drop in trade deficit in July-November 2009. While exports declined $7677 million from $8652 million, imports fell to $12374 million from $15705 million. This implies that reduction in deficit was not because of increase in exports.
Economists believe slowdown in imports is not a welcome sign for an economy that requires imports of machineries and other capital goods, foods, and oil to run its affairs and for its progress. Exports should be increased to a level to offset the cost of imports to economy, as per the common economic principle. When exports are increased, foreign exchange earned through exports can equalize cost of imports.
Unfortunately, Pakistan saw decline in its exports in July-November, 2009 due to several internal and external pressures. Slump in demand in the country's main trading partners was a factor that stunted the growth of exports in the period. However, most importantly internal problems like electricity and gas crises, and political and social disturbances dampened the production in the exporting industries.
Despite that, a modest improvement in the economic growth is expected in FY10, there is a need of implementation of structural and macroeconomic reforms to push the country onto the path of sustainable growth. It is worthwhile noting SBP's forecast that economy is to achieve over 3 percent growth this year.
SPB foresees services sector that has over 50 percent share in the GDP would be the custodian of growth in the next year. An analyst questioned the likelihood of this sector's buoyancy in the midst of ailing commodity producing sectors. Without improvement in manufacturing sector and rebound in imports, this support is not possible.
The opinion is tenable in the context of last year's performance of service sector that was adversely battered by slouch in imports and manufacturing sectors. During last fiscal year, performance of telecommunication and finance sectors was in the throes, as they failed to persist on earlier pace of progress.
The sector depicted abysmal performance last year, grew 3.6 percent that was half the growth a year ago. This not only caused sharp tax shortfall, but also affected the economy altogether. Main banking subsector was cautious in extending advances to private sector, which is a big portfolio for banks, owing to rising non-performing loans and reduced deposits.
High policy rate shifted the liquidity of commercial banks to government securities. High discount rate helped buildup of forex reserves and squeezed demand of central bank financing by making government securities' market rates attractive for banks, even though it restricted growth in imports.
Although, discount rate was reduced, it is not sufficient to fuel liquidity in the real sectors to push it on the recovery path. Large-scale manufacturing sector did not perform well during last fiscal year, but it was partly compensated by 4.7 percent growth in the agriculture sector, led by 23 million tons bumper wheat crop and 52 percent increase in government's procurement (support) price for farmers. There was a record rice production of 7 million tons, which earned the country $1.8 billion.
There is a fear that water scarcity would not let the agriculture sector give out the growth rate as it did in the last fiscal year, and thus the sector would limit its supportive share in the economic growth in FY10.
LSM was not saved from its downturn as of end of first half of this year since almost all foremost industry heads including textiles, food and beverages, petroleum products, chemicals, metal industries, and electronics registered negative growth during July-October, 2009. Overall, there was a slight growth of 0.67 percent. Textile manufacturing dropped 2.2 percent. Textile sector is a major foreign exchange earner. The slackness in international market affected its progress. Rise in textile exports depend on revival of consumer spending in Pakistan's main trading partners.
Pakistan's main exports include rice, leather, raw cotton, cotton fabrics, cotton yarn and thread, knitwear, bed wear, woolen carpets, fish, and fruits and vegetables. Its imports consist of minerals, fuel, and lubricants, machinery and transport equipments, foods, live animals, and vegetable oil and fats.
Structural bottlenecks such as power shortages and lack of product diversifications are rendering losses to the sectors.
Foreign investment declined 40.6 percent in July-December, 2009. Workers' remittances increased 24 percent in first half of FY10 to $4.53 billion as against $3.64 billion in the same period last year. Workers' remittances play a major role in the economic building of Pakistan. From 2.1 percent of GDP in 2001, the remittances increased its share to 4.7 percent in FY09. They constituted 5 percent of private consumption expenditures during 2003-09, according to a report of Asian Development Bank. It said United States, Saudi Arabia, United Arab Emirates continued to be the largest sources of such inflows in Pakistan. Post 9/11 scenario saw rise n remittances from these countries. Especially from United States, the inflows formed the 22 percent of total receipts, up from 12 percent in the timeframe of 2001-2009, it added. Remittances in Pakistan financed over 50 percent of the trade deficit and sometime they went ahead of foreign direct investments. In FY09, they financed 63 percent of the trade deficit and were equivalent to twice the level of FDI, it noted. Since joining ADB in 1966, Pakistan has borrowed about $18.59 billion, of that it received $12.3 billion as of the end of 2007. This lending program consisted of $2 billion loans and $20.2 million technical assistance grants.